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Is blockchain the answer?


Many people ask “what is blockchain?”, but much more important is to understand “what can blockchain do?”

One answer to this question is that blockchain can act as s foundational layer that sucks data from multiple sources and creates an accurate, verifiable record, based on which many of today’s manual decisions can be automated.

In that context, blockchain has the potential to remove delays, cut costs and reduce the need for specialists. It has massive implications for any activity that requires verification or validation – for example, in acquisition processes, in transactional records and exchange, in contract management. Arguably, for example, it could automate many aspects of world trade, cutting through laborious procedures such as customs and documentation checks.

An answer for Brexit?

It seems probable that blockchain will gain rapid publicity through some role in resolving the issues created by a post-Brexit world. It would be surprising if it is not being considered as a potential answer for the dilemma of a reconstituted border in Ireland. Blockchain could make that border ‘virtual’ and a successful pilot there would rapidly spread across international markets.

But much more broadly, there are already exciting pilots underway, a number of which were discussed at this week’s ACT-IAC forum in Washington DC. The use of blockchain can overcome the complexity of gathering and reconciling data from multiple sources – and the beauty is that it overlays those sources, it doesn’t replace them. Hence the cost and politics associated with its implementation can be low. Contract award procedures, compliance checks, performance management, identity verification, ownership rights – the areas which today cause extensive costs and delays are all within the potential scope of blockchain-based solutions.

This ‘democratization of data’ has massive impacts on business and society. Those impacts must be evaluated. But the answer for those who are affected is not to ignore blockchain and hope that it goes away, but rather to understand how it can benefit your area of activity and the nature of your work. Certainly, at IACCM we are closely involved with the development and use of blockchain, providing our members with the insights and understanding they need to ensure that blockchain is indeed ‘an answer’, rather than a threat.

I hope we will see you at one of our forums – be inspired!

 

Are you guilty of groupthink?


Larry Fink, CEO at Black Rock – the world’s largest asset management firm – has built the business around diversity. But he brings a new context to this theme, which he describes in a recent interview.

“People who are engineers like to be around other engineers. People with a background in political theory are generally around other people in political theory. People who have an affinity with one political party or another are generally friends with people in that political party. There are so many places where you see congregations of people around ideals, around education, around race. We have to break that down. Firms fail when you have groupthink. You generally have groupthink when you have replicants all around you.”

Fink goes on to welcome diversity – but makes the point that one critical aspect is frequently missing and that is ‘diversity of mind’. He illustrated this with the following comment: “It’s very easy to see across a business and ask, how many women are there? What’s the gender mix? It’s very easy to see if there is a diverse group of men and women with diversity of race. We don’t spend enough time asking: Do we have an organization with diversity of mind? I think this is where most companies fall down.”

Contracts – groupthink – what can you possibly mean?

Are those of us in contract and commercial management – those of us who produce contracts – guilty of groupthink, of both lacking AND ignoring diversity of mind? If you are not sure, consider for a moment this quote from a recent blog by Stefania Passera, an expert in design:

“As an information designer, my job is to solve complex communication problems. Contracts seemed to be a genre of documents in dire need of a user-centric makeover. We can pick any contract, and, at a glance, they just look and feel and read the same. This, from a design point of view makes no sense: why so much sameness in different documents for different users with different needs and skills, produced by different organizations to regulate different transactions with different goals? At best, we are foregoing the opportunity to create a meaningful touchpoint and build positive relationships and experiences with suppliers and clients. At worst, we are leaking economic and relational value!”

When you consider the diversity of people who need, use or are affected by contracts, it is indeed remarkable that ‘groupthink’ has remained so powerful, that the legal community, backed up by contract managers, has succeeded in perpetuating uniformity of approach in an area of such importance to business and the wider population.

Defining the contracting lifecycle


Many organizations do not have a well-defined, end-to-end contracting process. Frequently, contract-related activities appear as sub-elements in other processes – for example, in Product Lifecycle Management, Procurement or Project Management. Activities are therefore often ‘functionalized’ and this leads to a lack of cohesion and poor data flows. Ultimately, it means that no one has an overview of who is really responsible for producing a complete contract, nor how well the contracting process is performing.

Fragmentation carries a cost

This fragmentation is inevitably reflected in many of the automation products, since their development has been guided by functional users and driven by what they see as operational reality. The IACCM Automation Report in 2017 reflected the consequences of this perspective – a high level of dissatisfaction with performance, in particular due to the challenges of gaining user adoption. From conversations with many contract management technology providers, I understand their frustration in trying to assist their clients. All too often, software is being implemented to support a poorly defined process, with little analysis of user needs and limited appreciation of the true potential ‘return on investment’.

Where do contracts come from?

I realise that one of the issues here is the absence of an authoritative and over-arching view of the entire Contracting Lifecycle. As a result, there are multiple versions, using a variety of terminologies and with varying degrees of completeness. Most focus on the transactional phase and ignore the more strategic aspects – for example, where exactly do contracts come from? How and where are decisions made regarding individual terms or the commercial policies that affect them? Who defines and monitors the connection between customer contracts and required sub-contracts? It often seems that contracting is rather like the ancient mystery of childbirth – delivered by the stork!

It is time that we start to operate with a consistent view of the contracting lifecycle and therefore I am publishing the following overview. This will be discussed across the IACCM member community and I welcome comments and suggestions. The purpose is to have  common reference point and the reason is that the growing importance of contracting demands a more coherent and consistent understanding of how it operates. Based on this, we will also be better able to support the development of automation and to measure value delivered.

Defining a contracting lifecycle

I have broken the lifecycle into two major phases, one related to the oversight of the process itself, the other related to transactional activity. Clearly, there will be variations in the steps required depending on the nature of the agreement (for example, a commodity purchase is unlikely to involve any drafting or negotiation) and a fully detailed procedure will require inclusion of activities such as signature or storage.

Contracting Lifecycle: Operational Phase

  • Define – oversee development and define responsibilities and authorities within the contracting process
  • Develop – establish standard clauses / options and templates based on policies, practices and market strategies / requirements
  • Maintain – monitor issues, undertake research, propose improvements, update process or standards for shifts in internal or external conditions
  • Equip – ensure suitable tools, training for those performing activities within process
  • Analyze – undertake regular reporting on effectiveness of process in supporting business goals and priorities

Contracting Lifecycle: Transactional Phase

  • Evaluate – identify contract model required to support specific bid or proposal OR review counter-party proposed terms for acceptability (determine go / no-go)
  • Approve – evaluate non-standards and interdependencies (e.g. subcontractors, related contracts, resources); engage stakeholders required for review and approval
  • Draft – prepare required transactional documents or variations to standard
  • Negotiate – establish strategy, fall-backs, trade off; seek to reach consensus (go / no-go); redraft as required;
  • Implement – communicate signed agreement and obligations to all affected parties
  • Manage – oversee and report on performance; handle claims, disputes; negotiate and record changes
  • Close – manage termination or renewal, identify continuing obligations

Comments, suggestions, improvements – all are welcome. The important thing is that we develop and agree a standard.

Commercial judgment – there’s a disconnect


Whenever I run workshops about successful contracts and projects, there is always someone who raises the question of trust. There’s a widespread view that trust is the critical ingredient, making the difference between success and failure.

We can certainly debate whether this view is valid, but I think few would disagree that trust is a helpful ingredient and certainly, once lost it is hard to restore. But trust is also something you earn and is not automatically present. Within trading relationships, the extent to which trust matters is highly variable, but when it is absent we take a variety of steps to protect ourselves. First, we might undertake extensive investigations into our potential counter-party, asking questions, seeking references, undertaking searches. Then we may enter into a bidding process in which we are testing and evaluating capabilities and competencies, before moving into a formal negotiation in which we aim to extract specific promises related to performance – and consequences for non-performance.

Just because we are competent does not mean we can be trusted

But does any of this really build trust? Probably not. It may increase confidence, but that is not the same. Trust is ultimately much more about character and proven performance. It is also influenced by typical experience within or between cultures – hence we have significant variations due to different social value systems.

How well are corporations and government agencies doing when it comes to levels of trust? Not very, if all the surveys and indicators are to be believed. And much of that is because there is a real disconnect between what they say and what they do. Nowhere is this more consistently obvious than in commercial and contracting policies and practices. Here are a few examples:

  • Executives regularly claim that customers are the core focus of the business, but in reality they concentrate on cutting costs and maximizing shareholder returns.
  • Many organizations now have a ‘reputation management strategy’, yet if you ask how that aligns with their legal strategy, you will typically receive a blank look. There is no better example of this than the efforts to transfer contract risk. In a recent survey, the idea that contract terms should be aligned with brand image was soundly rejected by over 70% of participants.
  • Surveys of executive priorities show no alignment with public priorities. For example, big issues for business tend to be productivity growth, coping with market uncertainty and integrating digital technologies. The public reflects reduced trust, greater activism and concerns over the honesty and integrity of business and political leadership.

Within business, there is a big – and understandable – focus on competence and capabilities. Without these, it would indeed be hard to survive. But survival also increasingly depends on perception and experience – honesty, fairness, integrity and alignment with customer and social interests are the barometers that ultimately impact levels of trust. The single biggest driver of reputation is the extent to which  there is a gap between what you say you do and what you actually do.

And when it comes to commercial practices and terms and conditions, the gap is frequently quite large.

Compliance and value destruction


Compliance is important. In any large organization, rules – and clarity over the authority to deviate from them – must be defined. But in today’s business environment, where the speed of change is so rapid, how do we ensure that those rules are the right ones? How do we prevent compliance from becoming outdated, irrelevant, a source of competitive disadvantage?

This dilemma is nowhere more true than in the field of contract terms where an absence of data typically means that standards are based on opinion, rather than hard facts. Most term standards and templates are based on what organizations (and in many cases lawyers) view as ‘the norm’, yet they rarely have data to back up their opinion, nor do they have reliable sources to know when change is needed or could generate greater value. A system that measures and rewards people on compliance rates is not the sort of system that supports challenge or welcomes alternative facts.

The focus for compliance in today’s contracts tends to be on those terms and conditions related to minimizing risk consequence – for example, liabilities, indemnities, intellectual property rights. This is the simple – and lazy – way of protecting the business. In the volatile and uncertain environment we now face, do we actually understand our risks? It is quite clear that in many cases, either the answer is ‘no’, or alternatively that we decide to ignore them. Hence we often produce contracts that in theory protect us against failure, yet fail to address the much bigger and more prevalent risk that we will not achieve success.

The question we should regularly be asking is not “Are we compliant with our corporate policies?”, but “Do we know our risks and are we confident that we are addressing them responsibly and pragamatically?” It is through periodically addressing this question that we develop an organization which seeks data and information, which captures and records actual experience, which develops cross-functional teams to test and update established rules and policies.

Simply ‘being compliant’ is a mindless activity, performed with much greater reliability and accuracy by machines. Real and measurable value comes from knowing when not to be compliant, or when the rules of today need to be changed. In many organizations, I do not observe enough people questioning and challenging the status-quo. Perhaps just ‘going with the flow’ is more comfortable – but it rather depends on where that flow is taking you.

Commercial ethics – a universal need


In the context of human exchange, when do we need contracts and what should we use them for? I’ve been pondering those questions in the context of two very different situations – one being an article on commercial contracting in South Africa’s informal sector, the other being the recent collapse of Carillion, a major outsource provider based in the UK.

Contracts and ‘norms’

The first article, written by two South African academics, contrasts the use of formal contracts by the corporate sector with the use of social norms in ‘the popular economy’. It observes that humanist values – which have no basis in law – govern the informal transactions and trading relationships that operate within the native community. The authors (both being lawyers) are asking whether there should be a ‘dedicated indigenous law of contract’, distinct from the ‘centralized law of the state’.

The examples of the South African social norms that make contracts unnecessary seem to me rather universal. For example, local reputation is important within any integrated community and the creation of alternatives to the formal banking, insurance and financial services sector has been quite normal for many years. ‘Private law’ operates not only within physically conjoined communities, but also across whole areas of commerce, such as diamond traders. As I have observed in other blogs, the ubiquitous nature of contracts is a relatively recent development and has in large part been driven by the erosion of more localized relationships and the need for honorable behavior.

Contracts and power

And this brings us to Carillion, which is a sad story of commercial ineptitude and – in the view of many – less than honorable behavior. It is a story in which contracts abound – and perhaps illustrate the extent to which many contracts today are not instruments of integrity, but rather instruments of power and imposition. In Carillion’s case, the value of contracts was overstated; it appears that customers did not care about the reasonableness or practicality of the terms they were imposing. Carillion seems to have had little concern about its workers or its sub-contractors, operating with zero-hour contracts for the former and draconian payment terms for the latter.

What can we gather from this? Certainly contracts have a valuable purpose. They are needed to memorialize transactions and prevent disputes. They should also be a reliable and auditable record of obligations and value, which would enable effective assessment of the health of a business. At their best, they provide an operational framework that supports a mutually successful outcome for the transacting parties.

But often contracts are not like that. They are in fact established precisely to override social norms and reasonable values. In these cases, they are about power and distance – and ultimately they undermine sustainable economic growth and social development. Carillion is a prime example, where those with existing power and wealth seem to have emerged better off and those with little power or wealth have been left with nothing.

A nobler purpose?

If contracts are going to increasingly regulate human interaction, it seems to me that we can no longer ignore the extent to which they should be reflecting ethical principles. Equally, they should be structured in a way that allows effective economic analysis. Until then, it seems to me that South Africa – and indeed most other communities – might be better off sticking with social norms.

And finally, is it time that contract and commercial professionals start to operate with a more formal ‘Code of Practice’?